Whitley v. Klauber

Citation416 N.E.2d 569,435 N.Y.S.2d 568,51 N.Y.2d 555
Parties, 416 N.E.2d 569 In the Matter of Harry T. WHITLEY, Respondent, v. John L. KLAUBER et al., Defendants, and Daniel T. ALAGNA et al., Appellants.
Decision Date25 November 1980
CourtNew York Court of Appeals

MEYER, Judge.

When, as part of a plan to dispose of the assets of a limited partnership, all of the general and limited partners sell their interests in the partnership to a corporation in exchange for stock of the purchaser's parent corporation, have the limited partners received a return of their partnership capital within the meaning of subdivision (4) of section 106 of the Partnership Law? If the answer to that question is affirmative, may a judgment creditor of the limited partnership who became a creditor prior to such sale recover from the former limited partners, to the extent of their respective capital contributions thus withdrawn, without relitigating the cause of action underlying the judgment against the partnership, even though the limited partners were not party to the action in which the judgment was obtained? The Appellate Division, 69 A.D.2d 99, 417 N.Y.S.2d 959, reversing Special Term, answered both questions in the affirmative and directed entry of summary judgment against the appealing limited partners in the amount of the contribution of each, with interest. There should be an affirmance.

Presented by this appeal are not only the two issues concerning construction of the Partnership Law and the binding effect of the prior judgment outlined above, but subsidiary questions concerning whether plaintiff has failed to exhaust available remedies and whether he is barred by limitations and laches. The subsidiary questions are sufficiently answered in the Appellate Division opinion and will not be further considered here. As to the Partnership Law, six of us agree that the strong policy enunciated by section 106 permitting a creditor who was such when a limited partner's capital was returned to him to recover from the limited partner to the extent of the capital returned, with interest, even though return of the capital was entirely proper, mandates the conclusion that a transaction or series of transactions in which all general and limited partners dispose of their interests in the limited partnership leaving a creditor unpaid constitutes a return of capital notwithstanding that in form it is the sale of the limited partners' interests. On the question whether the judgment against the partnership binds the limited partners, five of us are agreed that it does, not on any theory of collateral estoppel but because the partnership, in whose right the creditor sues the limited partners to recover partnership assets (the capital, though rightfully returned), has already fully litigated its obligation to the creditor as such.


The facts upon which turn determination of the issues stated above are rather complex. Black Watch Farms was organized in 1962 as a limited partnership to manage and breed purebred Angus cattle as a tax shelter. Its principal general partner was BW Farms, Inc. ("BWF"), a New York corporation, whose president and principal shareholder, Jack Dick, was also Black Watch's general manager. BWF was also a limited partner in Black Watch, owning 14% of the limited partnership interests. The other 86% of the $1,000,000 capital contributed to the partnership came from tax shelter investors who became limited partners.

In March, 1968, Black Watch entered into an exclusive agreement with plaintiff Whitley to pay him a finder's fee if a sale of its assets were concluded with any of five prospects, including a corporation now known as Bermec Corporation. However, not long thereafter, having unsuccessfully attempted to persuade Whitley to relinquish his exclusive rights, Black Watch instructed him to cease all further contact with Bermec. In May, 1968, Bermec announced its intention to acquire Black Watch. On May 23, 1968, plaintiff Whitley's attorneys informed both Black Watch and Bermec of his claim for a finder's fee on the then proposed transaction. On June 21, 1968, an agreement of sale was executed by BWF, Jack Dick, Bermec and Black Watch Farms, Inc. ("INC"), a wholly owned subsidiary of Bermec, pursuant to which BWF sold to INC for Bermec stock valued at $20,500,000 all of its assets, including its general and limited partnership interests in Black Watch. The agreement provided that INC was to be substituted for BWF as general partner of Black Watch and obligated Bermec itself to offer to purchase, for an aggregate of $10,500,000 in cash or Bermec stock less a finder's fee to a company other than plaintiff, from each of the other Black Watch limited partners, the entire 86% of limited partnership interests in the same proportion as the individual partners' interest in Black Watch bore to the 86% interest held by the limited partners other than BWF.

The offer was made by a prospectus which acknowledged that Bermec was obligated by the June 21, 1968 agreement to make the offer, stated that Bermec opted to offer stock rather than cash, set forth the amount of the finder's fee to be deducted, and fixed an expiration date of January 7, 1969. All of the limited partners of Black Watch accepted the exchange offer. INC thus became the sole general and sole limited partner of Black Watch and distributed to itself all of Black Watch's assets.

On August 21, 1968, no response having been received to his attorneys' letter, Whitley began an action against both Black Watch and BWF, which resulted, some eight years later, after entry and vacation of two earlier judgments, in judgment against Black Watch and BWF in the amount of $1,552,034.50. On November 29, 1977, the appeal by Black Watch and BWF from that judgment was dismissed for failure of prosecution. In the intervening years, however, Black Watch had been dissolved and its limited partnership certificate had been canceled on August 15, 1969, BWF had distributed its only asset (the Bermec stock received by it), Jack Dick had died, and Bermec and INC had both gone bankrupt. Whitley has realized on his judgment, therefore, only $20,983 paid to him as a creditor in the INC bankruptcy.

In April, 1978, Whitley began the action which is the basis of this appeal against the available former limited partners (other than BWF) of Black Watch. His complaint contained allegations establishing that his finder's fee claim was an outstanding obligation of the limited partnership when the interests of the limited partners were acquired by Bermec as well as when the June 21, 1968 agreement was signed. By separate motions plaintiff moved for summary judgment against Daniel T. Alagna, Fania Friedman and Phemie Goldman (the "Alagna Group"). They and certain other defendants cross-moved for leave to amend their answers and all of the defendants cross-moved for summary judgment. Special Term denied plaintiff's motions for summary judgment and granted defendants' cross motions dismissing the complaint. It held that absent a showing of fraud the transfer of defendants' limited partnership interests could not be equated with a return of capital to defendants. The Appellate Division reversed, granted summary judgment to plaintiff against the Alagna Group, and denied the cross motion of the other defendants for judgment dismissing the complaint. This appeal by the Alagna Group defendants followed.


Subdivision (4) of section 106 of the Partnership Law provides that: "When a contributor has rightfully received the return in whole or in part of the capital of his contribution, he is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors who extended credit or whose claims arose before such return." In determining the meaning of the words "return * * * of the capital of his contribution" 1 one must look not only to those words but to the purpose of the provision and to its context as well (McKinney's Cons. Laws of N.Y., Book 1, Statutes, §§ 96, 97). That the purpose of the subdivision is the protection of creditors is crystal clear not only from the explicit reference to "creditors who extended credit or whose claims arose before such return" but also from the imposition of liability under its provision even though the contributor has "rightfully received the return." It follows that primary in the determination whether a particular transaction constitutes a return of capital is not the limited partner's purpose or intent or how the transaction is structured but its effect upon partnership creditors.

On the basis of that overriding purpose we and other courts have held limited partners liable under subdivision (4) of section 106 notwithstanding the absence of fraud, the fact that property other than cash is received by the limited partner or the fact that the transaction takes the form of a sale of the limited partners' interests to a third person, rather than a distribution by the partnership itself. Thus, in Kittredge v. Langley, 252 N.Y. 405, 169 N.E. 626 2 we held that even though the assets remaining with the partnership at fair valuation were more than enough to discharge its liabilities to creditors who were such at the time a limited partner received back his contribution, the limited partner remained liable to the creditors. Though decided under pre-existing law, the opinion in that case, by Chief Judge CARDOZO, analyzed the Uniform Limited Partnership Act provisions which had been enacted after the repayment there in issue. In that opinion he noted that the provisions of article 8 of the Partnership Law "are declaratory of existing law" (252 N.Y., at p. 421, 169 N.E. 626),...

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